Coleco Industries was doing quite well with its Telstar pong units, that was until competitors jumped in on the craze and over-saturated the market with clones. The Telstar was pushed even further out of the picture when more advanced consoles with interchangeable cartridges (such as the Atari 2600 and Fairchild Channel F) were introduced. While Coleco managed to survive with its non-electronic toys (such as Cabbage Patch Kids dolls) and their handhelds (which were experiencing some loss of market due to the new consoles with interchangeable games), they needed to get with the times to regain popularity.

Thanks to the Atari 2600 and other popular consoles of the time, the home video game market resurged, and Coleco wanted a piece of the action. By 1981, they had begun development on their new system (to be called the "ColecoVision") that would be superior to the competitors consoles as it would provide arcade quality graphics and gameplay (thanks to a Z-80A processor). Arcade conversions were popular at this time - Atari had built a following around them as they were able to make home versions of their own arcade games. Coleco was not as fortunate. They had no presence in the arcade industry and so they had to get licenses to the rights of arcade games made by other companies. Their first target was the very popular Donkey Kong by Nintendo. An agreement was reached by December 1981. Coleco then proceeded to get licenses for other coin-op games.

The ColecoVision was given controllers similar to the APF Imagination and the Mattel Intellivision and even had the same onboard storage for them. An expansion port was also featured on the ColecoVision, which would be capable of housing future add-on devices.